Fair is fair -- except with the shorts

Commentary: Speculators hit the exits, and we're all a-Twitter

By

DavidWeidner

NEW YORK (MarketWatch) -- The Securities and Exchange Commission's rule against naked short positions in 19 banks was successful in the same way giving a baseball team four outs per inning is successful in helping it score more runs.

Since the rule has been in place, Bank of America Corp.
BAC, -0.75%
is up 81%, Lehman Brothers Holdings Inc. is up 41%, J.P. Morgan Chase & Co.
JPM, -0.72%
is up 32%, and even Merrill Lynch & Co.
MER, +0.00%
is up nearly 10%.

SEC Chairman Christopher Cox said naked short positions "turbocharge" an environment in which false information may ruin a company that's already under threat from a "distort and short" campaign.

So, on July 15, the SEC attempted to halt a series of deep price declines in financial stocks by outlawing the practice of taking short positions without actually locating and borrowing the shares.

The rule, which was extended July 30, will expire Tuesday night, but it probably won't be long before a more permanent rule is in place. The comment and drafting period aimed toward making a permanent rule is expected to begin within two weeks, said SEC spokesman John Nester.

The emergency rule may have worked, but it wasn't fair. It protected some banks but left others such as Wachovia Corp.
WB, -0.28%
at the mercy of these distorters and shorters. It also wasn't fair to short sellers, who, despite the SEC's characterizations, were pursuing a perfectly legal trading strategy only to find the rules changed midgame.

"Naked shorting was never an issue with the 19 stocks covered by the SEC emergency order," said Eric Newman, portfolio manager at TFS Capital. "Creating uncertainty was the only effect of the order, and this served to artificially buoy the markets as short sellers covered their positions. Even without extending or expanding the emergency order, this uncertainty will remain."

In crafting the new rule, the SEC should make it broad enough that everyone is playing by the same rulebook. The commission should also remember that the market, not the government, decides a company's value each day.

Speculators exit

What happened to the global demand that was fueling record oil prices?

You remember: The world, driven by the hothouse economies of Brazil, China, India and Russia, was consuming oil at such a rate that the price of light sweet crude was going to soar to $200 by July 4.

For a while, it looked like it might happen, if not on Independence Day then by the end of the summer. Oil hit $147.20 in the Nymex pits on July 11. It sputtered and has been in close to a free fall ever since, losing 21% over that span.

Now, the expectation is that oil will sink to $100 a barrel. See full story.

So what's changed? Not demand. It's still creeping along. The world will use 1.1% more oil next year, about the same growth rate as this year and the year before, according to the International Energy Agency. China's share is growing but at about the same 6% rate it has been for the last four years, IEA estimates.

Supply hasn't changed. Even if offshore drilling becomes a reality, it's unlikely to have a profound effect on supply, and it won't happen soon. Many experts say such drilling isn't even necessary. After all, there is no oil shortage, just higher prices.

Could it be the end of speculation? As we pointed out in May, between $100 billion and $120 billion in new speculative money entered the energy markets during a three-year span ending in 2006, according to a congressional report. Investment in commodity index funds surged more than 500% to $80 billion during the same period. Hedge funds do 55% of derivatives trading, according to a study last year by Greenwich Associates. See earlier column on speculation.

Fearing a top, a lot of that money has pulled out or gone short. But don't tell that to those who say big oil companies and global growth are to blame. They seem to think demand is coming from a very specific region: Fantasyland.

Twitter

Technology always is bringing us new ways to share ideas. The comments section of MarketWatch is one of those, but let's be honest: The posts are often too long for readers to sort through, and the conversation can degenerate into a stew of ideas that make interest-rate swaps look easy.

So I've decided to follow the lead of some of my colleagues by creating a Twitter account. The great thing about Twitter is that contributors have to be concise. Posts have a 140-character limit, so everyone has a level playing field. There's a lot of value in keeping it short and sweet, as many readers have told me.

We can also talk about some issues that haven't been mentioned in the column. It can be a place where anything goes, and I promise to interact by asking questions and responding. That's the kind of participation I haven't been able to provide to the comments section -- which, of course, is still a great place to leave your thoughts. I will continue to read it.

I'll also use Twitter to let people know when I'm doing TV on Fox Business or CNBC or making an appearance on another media outlet. Let's see how it goes, and thanks for giving it a try. Go to David Weidner's Twitter page.

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